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That's the term budget wonks use to describe automatic federal spending cuts that are set to begin in January. For months, U.S. aerospace and defense firms have warned that across-the-board cuts put into law by last year's Budget Control Act would spell disaster for the industry. Now they are starting to talk openly about when they might have to hand out pink slips to their employees.

With more than $50 billion in new Pentagon cuts set to kick in in early January, industry officials say they must begin notifying employees of potential layoffs or plant closings this fall, consistent with state and federal laws. In an election year, however, it's unclear whether lawmakers can agree on a deal to reverse some of the cuts.

It's also unclear how extensive the job cuts would be. The National Association of Manufacturers said in a June 21 report that Pentagon spending cuts may lead to the loss of more than 1 million jobs, including 130,000 manufacturing jobs, by 2014.

Robert Stevens, the outgoing chief executive of Lockheed Martin Corp., the Pentagon's biggest contractor, has emerged as the industry's most prominent voice urging lawmakers to agree on measures to avoid the cuts.

In a question-and-answer session with reporters in June, he said the additional cuts would be a "blunt force trauma" to the industry.

ENLARGE

A Lockheed Martin plant in Texas builds F-35 fighter jets.
Reuters

"Over the past few years, we've reduced costs by billions of dollars; we've removed a million and a half square feet (139,400 square meters) from our facilities' footprint; and we will reduce another 2.9 million square feet before the end of 2014," Mr. Stevens said, referring to Lockheed's own belt-tightening measures. "Today, our workforce is 18% smaller than it was just three years ago, and the pace of our hiring has slowed considerably."

The prospect of sequestration, Mr. Stevens continued, means "the near-term horizon is completely obscured by a fog of uncertainty."

The defense and aerospace industry is already bracing for an initial round of Pentagon cuts that will scale back U.S. military spending by around $487 billion over the next 10 years.

But unless Congress changes the law, the Budget Control Act imposes additional spending cuts of $1.2 trillion over the next decade, roughly half of which will fall on the Defense Department.

U.S. Defense Secretary Leon Panetta has described sequestration as the "meat ax" approach to reducing defense outlays. And he has urged Congress to halt the automatic cuts, saying they would compromise national security.

"The Defense Department is not a jobs program," Mr. Panetta told lawmakers in June. "It's a program to defend the nation. But clearly, that kind of sequestration cut across the board would have a serious impact, not only on men and women in uniform but on our personnel and the contractors who serve the defense establishment."

Manufacturers say they have already streamlined their organizations, reducing floor space and trimming their payrolls as part of a broader austerity drive that began under former Defense Secretary Robert Gates. Cutting further, they say, will have a more lasting impact by forcing the layoff of experienced workers and driving out engineering talent.

"It's not like you're in 1985, when you have all these massive organizations that can absorb these impacts without feeling it," said Erin Moseley, senior vice president for government relations for BAE Systems, Inc., the U.S.-incorporated arm of BAE Systems PLC of Britain.

The impact of budget-cutting in Washington has already rippled through the industry. Early this year, Boeing Co. said it planned to close its Wichita, Kan., defense plant, where the company upgrades military jets and maintains Air Force One.

Protecting defense funding, however, would require cuts to other domestic-spending programs. Lawmakers are not yet close to reaching a deal to offset defense cuts.

"No one was thinking we would hit sequestration," said defense budget analyst Jim McAleese. "It was the consensus among the industry and the military that there would be a compromise."

Contractors, Mr. McAleese added, are now "embarking on a cash-preservation strategy."

Talk in Washington now focuses on whether lawmakers can in fact reach some kind of compromise. Sen. Carl Levin (D., Mich.), the chairman of the Senate Armed Services Committee, recently told reporters that defense would not be immune from additional cuts. But he held out hope that the cuts could be much less drastic if a deal is reached.

Sen. Levin said his "best guess" for a compromise figure would be an additional $10 billion per year reduction over a 10-year period.

"I think defense has got to contribute, but I think we've got to be very, very careful that we don't do the draconian approach either on defense or the other important programs like education, health care and so forth," he said.

Mr. Hodge is a Wall Street Journal staff reporter in Washington, D.C. He can be reached at nathan.hodge@wsj.com.

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